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A reader is concerned that she and her husband aren’t paying tax on their savings
April 25, 2024 10:39 am(Updated 10:42 am)
(Photo: Halfpoint Images/Getty Images)
Are you in financial agony? Ask Paul Lewis, broadcaster and our new financial agony uncle. Is there something you’ve always wanted to know but don’t understand? Do you need to know your rights in a situation? Have you been in a situation where you think you’ve been ripped off?
Paul can help. He can’t take on individual cases or try to force firms or the Government to be reasonable. But you can send all those questions about things that puzzle you involving money to Paul at [email protected] and he will answer some of them in this column. Remember, it’s your column so get those questions coming in.
Helen emailed: I am retired but as a fairly low paid and part-time worker who never paid the full national insurance contributions, my pension is small so I am exempt from paying tax on savings. Consequently, over the years our joint savings (my husband’s and mine) have always been in my name. We have now built up a good sum, so much so I wonder if this should be declared to HMRC. My husband is 90 and I am 85 and we don’t want to be seen as fraudulent. This is worrying me so I would be glad for your guidance.
Paul responds: Thank you so much for this question, Helen. A lot of pensioners are having similar concerns. Please do not worry about being seen as fraudsters. First, I think it is highly unlikely that you owe any tax on your savings interest. Second, if you do then it is up to HMRC to contact you. If you have not had a letter from HMRC you can assume you do not owe money.
In the past most pensioners did not need to worry about paying tax on savings interest. But two things have changed.
First, the interest rate paid on savings has shot up from almost zero to as much as 5 per cent a year. Secondly, the state pension has risen substantially over the last couple of years. The new state pension – which you are too old to get – is now £11,500 a year, not far off the threshold where income tax begins at £12,570. So many pensioners worry they may have to pay tax on their interest. However, three rules make that very unlikely if your other income is low.
The first £1,000 a year of interest earned on savings is free of tax for most people, except high earners. This is known as the personal savings allowance.
Even if your savings earn as much as 5 per cent you would need £20,000 in the bank to exceed that savings allowance. The allowance is reduced for higher rate taxpayers but I know that does not apply to you.
The second is the “starter rate for savings interest”, which means some people can earn even more from savings interest without paying any tax. It applies to people whose total income is below £17,570 a year.
If your income from pensions and other sources is no more than £12,570 a year then the starter rate applies to the first £5,000 savings interest above that. If your other income is between those two amounts it applies to the difference.
So if your other income is £15,570 the starter rate applies to £17,570 to £15,570 which equals £2,000.
On top of that you can add the £1,000 personal savings allowance. So up to £6,000 of savings interest is free of income tax. Even with interest rates at 5 per cent that means interest on £120,000 can be free of tax.
Thirdly, if your other income is less than £12,570 the gap between your income and that amount is also tax-free.
For example, say someone has a small state pension of only £100 a week or £5,200 a year. She has £12,570 as a starter rate for interest, leaving her with £7,370 tax allowance left. That is the first tax-free amount of interest. On top of that she has the £5,000 starter rate for savings and the £1,000 savings allowance, meaning that a total of £13,370 interest could be free of tax.
Even on an account paying 5 per cent that would mean no tax was due on the interest from £267,400 in her savings account. Interest of a quarter of a million tax free! Though I should add if her interest did exceed £10,000 in a year she would have to fill in a self-assessment form.
You and your husband sensibly made sure that you – the non-taxpayer – own most of your savings. That is usually the best way for a couple to minimise the tax that may be due. Moving money between spouses can be done without worrying about other taxes – though you have to trust each other.
If you are not married or in a civil partnership there may be inheritance tax due when the giver dies if you move more than £3,000 a year to your partner. The answer to that is to live at least seven years after making the gift as it then drops out of the inheritance tax calculation.
If your savings are enormous and income tax is due on them then a taxpayer will find the tax code for their earnings or company pension is adjusted automatically by HMRC. Banks and building societies report interest paid to HMRC so it can collect any tax due on interest by taking more tax from that other income.
A non-taxpayer who owes tax on savings interest will be contacted by HMRC and sent a simple assessment form showing how much tax they should pay and how – either by cheque or online. If you have not had a letter you can assume you do not owe tax. More information is available here – gov.uk/simple-assessment. But, as above, if it does exceed £10,000 in a tax year a self-assessment form must be completed.
Finally, Helen, do remember your savings are there to give you and your husband the best final years you can have. Please don’t hoard them forever.
